Balancing Growth and Continued Innovation

Why do large organizations struggle to innovate? How can you sustain innovation in your organization as it grows?

Maintaining innovation is a major concern for organizations as they grow. According to Safi Bahcall, the author of Loonshots, it’s possible to balance growth with continued innovation. The key, he says, is to balance stake with rank.

Here’s how organizations can keep innovating no matter how big they grow, according to Safi Bahcall.

Phases of an Organization

One of the central ideas in Loonshots is the notion that organizations operate in different phases, a concept Bahcall borrows from his background in physics. Matter can exist in one of several different phases—the basic ones are solid, liquid, gas, and plasma. Bahcall says that groups also exist in phases that are tied partly to group size. 

He makes an analogy to traffic jams: When a road reaches a critical mass of traffic traveling at a certain speed, spontaneous traffic jams become a certainty. The system snaps from free-flowing to jammed. Bahcall argues that the principle of group phase dynamics explains why organizations tend to leave innovation behind as they grow: Once an organization reaches a certain size, it changes from the loonshot phase to the franchise phase.

(Shortform note: Bahcall relates these ideas to what he calls the “magic number.” He uses several anecdotes and a mathematical formula to suggest that an organization changes phases when it hits a specific number of members (150). His explanation of this number is somewhat confusing and the evidence for it (by his own admission) is questionable. More importantly, his only point in introducing the magic number is to argue that you can raise that number, which is really just a more complicated way of saying that you can maintain innovation as your organization grows. Therefore, we’ve left out the details of Bahcall’s magic number theory and focused instead on his suggestions for maintaining innovation.)

The good news, Bahcall says, is that system phase changes are dictated by control parameters—and size is only one of these. In the case of traffic, the main parameters are the number of cars and their average speed. That means you can prevent jams by reducing the number of cars or by lowering the speed limit and introducing stoplights. By extension, Bahcall argues that by manipulating the parameters that control organizational behavior, you can maintain innovation even as your organization grows

Limitations of Bahcall’s Phase Theory

It’s worth noting that Bahcall’s theory of phase management is only relevant to organizations that combine loonshots and franchises under one roof. Vannevar Bush didn’t manage the OSRD’s phases. The OSRD was a self-contained loonshot think tank. It never intended to develop into a franchise; it existed to provide loonshots to the already franchised military establishment. Bahcall himself points out that some industries consistently operate with this level of separation, as with the previously mentioned symbiosis between biotech startups and big pharmaceutical companies. In these cases, phases—and the principles that govern them—don’t seem particularly important.Besides, sometimes your goal might be to grow your loonshot into a franchise. If that’s the case, your concern isn’t managing the phase shift so much as getting to it in the first place. Instead of worrying about the magic number, you’d probably be better served by thinking about growth mechanisms and about how to get customers to adopt your idea as soon as possible.

Stake and Rank Control Organizational Behavior

Bahcall argues that besides group size, the two main factors that control organizational behavior are stake and rank. He says that these are the two motivating forces in any organization and that they are in constant competition with each other. According to Bahcall, when the importance of rank outweighs the importance of stake, the organization snaps into the franchise phase.

Bahcall notes that in a small, new, innovative business, everyone has a high stake in the organization’s success, and their rank relative to each other is not that important as compared to their stake in the business’s success or failure. Once the business is established and heading into the franchise phase, rank (which comes with promotions, job titles, better salary and benefits, and so on) becomes more important. 

(Shortform note: Throughout this section, we’ll also be looking at organizational politics. Bahcall sees organizational politics as a byproduct of the franchise phase and seems to regard them as the generally undesirable opposite of project work, by which he means both innovative development and a general focus on the quality of your work.) 

Therefore, Bahcall says, the key to keeping an organization innovative as it grows is managing the relationship between stake and rank. He identifies four key factors that go into this balance:

1) Salary step-up: How much more money you earn for a promotion. The more money conferred by higher rank, the more incentive you have to engage in politics rather than innovation.

2) Span of control: How many direct reports each manager has (the lower this number, the more managers there are relative to the size of the organization). The more managerial positions exist (the smaller the span), the greater your incentive to work your way up the ladder rather than focusing on innovation or quality.

3) Equity fraction: How much your pay is tied to the quality of your work, how much the quality of your work affects the overall success of the company, and how much that overall success is reflected in your compensation. The less equity you have in the company, the less incentive you have to innovate and the more incentive you have to politic your way into better compensation.

4) Organizational fitness: A parameter that measures how well the company matches workers’ skills to projects and how important politicking is at the company. High fitness means that the company assigns workers to projects they are skilled at and places little importance on politics. Low fitness means companies give workers projects they are ill-equipped to handle and allow politics to dominate the workplace. In a low-fitness organization, you have little incentive to do excellent work or to focus on innovation.

Balancing Stake and Rank

Now that we understand the variables that affect the magic number equation, we can look at ways to manipulate those variables to balance growth with continued innovation. Bahcall offers the following suggestions for adjusting the balance between stake and rank:

Use Rank Carefully

Bahcall points out that you can directly control the influence of rank if you choose the correct spans (number of direct reports per manager) for each part of your organization. Bahcall explains that loonshot groups do best with large spans (fewer managers). That’s because large spans encourage creativity rather than control. Bahcall also notes that the fewer managerial positions there are, the less anyone cares about rank and the more peers are likely to help each other with projects rather than competing with each other for promotions. Plus, he says, creative people will be surrounded mostly by their peers, and that’s whose opinions and input they respect most. (Shortform note: Also, the fewer managers there are, the less micromanaged the creatives in your organization will feel.) 

On the other hand, franchise groups do better with smaller spans (more managers). As Bahcall explains, smaller spans encourage control and consistency, which are more desirable than creativity in the franchise phase. You don’t want military officers or soldiers experimenting with new tactics or new technologies in the middle of a battle, and you don’t want an established company completely changing its products or its business strategy on a whim.

(Shortform note: Along with span of control, it’s also worth considering how centralized or decentralized control is in the organization. In Turn the Ship Around, L. David Marquet promotes a leader-leader model in place of a traditional leader-follower model. Even in a rigid military rank structure (Marquet’s book is based on his tenure as a naval submarine captain), Marquet shows that it’s possible to decentralize control in order to promote better and more flexible decision-making at all levels. Techniques for doing so include managers letting supervisees make their own decisions rather than jumping in, and asking employees to take responsibility for their own work rather than monitoring their every move from the top down.)

Maximize Project-Skill Fit 

In addition to thinking about how you manage your teams, you should also pay attention to how you assign team members to projects. Bahcall points out that employees who are underskilled for a project stand little chance of success. They are likely to be frustrated, unhappy, and to get fired when their project fails. On the other hand, employees who are overskilled will do a good job quickly, then get bored and have little left to do but play politics. 

Bahcall recommends aiming for an ideal balance in which employees are challenged, but have a high chance of success. He says management should intervene proactively if the fit is bad. He believes it’s worth spending money to get project-skill fit right, because your projects will do better, your employees will be happier, and talented candidates will want to work for you.

Use Smart Incentives

A final way to raise the magic number is to craft incentives that promote the sorts of behaviors you want. Bahcall warns against large step-ups in salary or in hard equity (stock options and the like). He argues that large step-ups encourage people to focus more on promotions (and any related politicking and backstabbing) than on their projects. Bahcall says this problem is especially pervasive at middle management, where it is hardest to evaluate performance and where, with the wrong incentives, the best way to improve your position is to lobby for promotion rather than doing your best project work.

Instead, Bahcall suggests that it’s better to use soft equity: Put people in positions where they are motivated by earning respect and recognition from their peers, not just by earning more money. Bahcall says this goes hand in hand with giving people autonomy and visibility, so that the pressure is on to do a good job rather than to network and self-promote.

(Shortform note: Patrick Lencioni offers a few more suggestions for creating soft equity, such as creating public goals and standards and rewarding teams rather than individuals for meeting these goals. Doing so, he says, creates public accountability and team spirit and discourages individualistic behavior.)

Likewise, Bahcall points out the need to recognize and avoid perverse incentives—incentives that sound good but actually encourage unwanted behavior. He recommends hiring a specialist to be in charge of incentives (a chief incentives officer). His reasoning is that good incentives are a strategic challenge and require considerable thought and innovation in their own right. (Shortform note: Literature gives us one example of perverse incentives: 19th-century novelists like Alexandre Dumas were often paid by the word or by the line, which encouraged extremely long books (to maximize word count) and long dialogue exchanges of one or two words at a time (to maximize line count). 

Balancing Growth and Continued Innovation

Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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